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Facebook one year later: the IPO it should have been

Facebook's IPO was a botched effort from valuation to execution. A year later, what have they learned?

A Facebook employee holds a phone that is running the new "Home" program during an event at Facebook headquarters during an event at Facebook headquarters on April 4, 2013 in Menlo Park, California.
(Photo by Justin Sullivan/Getty Images) (Justin Sullivan / GETTY IMAGES)

On the eve of the one-year anniversary of Facebook’s initial public offering flop, Tableau, a Seattle-based data-visualization company, rang the bell Friday at the New York Stock Exchange for its own IPO, raising $254 million (all figures U.S.) while its shares jumped 64 per cent from the listed $31 per share, closing at $50.75.

Tableau’s public offering wasn’t stained with over-valuation, delayed starts, technological glitches and potential lawsuits of the social media giant.

The hell that broke loose on May 18, 2012 — a blockbuster event that led to the so-called “Facebook curse” for the technology IPO market — was absent in the relatively seamless offering last week.

“Tableau is the IPO Facebook should have been,” said Kathleen Smith, principal at IPO experts, Renaissance Capital.

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Smith says the Facebook flop was more of cleansing than a curse, and paved the way for a better environment for investors.

“Facebook may have been the catharsis the IPO market needed to find a clearing price and start producing returns for investors,” Smith said.

One year ago, the hype around the highly anticipated Facebook IPO brewed a perfect storm. Demand drove valuation and the stock was priced at the high end of the valuation range, at $38 (U.S.) per share, and on the eve of the IPO an additional 25 per cent of shares were made available.

Scott Kessler, a senior equity analyst at S&P Capital IQ, said the general sentiment was that Facebook stock was a “can’t miss.” Investors ignored valuations and were “just indiscriminately looking to buy the stock.”

But at 11 a.m. that day, the NASDAQ trading systems seized up, delaying the start of the IPO by a nervous half hour for investors.

Problems began to mount when trading opened and orders were lost in limbo, leaving some investors clueless if they had even purchased stocks and at what price. A batch of early purchases was completed at 1:50 p.m., after the price had jumped up to $42, according to a dismissed class-action lawsuit against NASDAQ filed in New York State.

Lead underwriter Morgan Stanley went on the offensive to stabilize the stock as investors tried to dump shares in the afternoon. It closed at $38.23 and raised $16 billion.

“If you were Facebook, it was a very successful IPO,” said Brian Wieser, a senior research analyst with Pivotal Research Group.

“They would have wanted to have left if not money on the table, at least conditions that would have led to a stable stock price in period following the IPO.

“That didn’t work.”

The stock quickly fell off a cliff when investors realized Facebook had yet to formulate a plan to monetize their mobile platform. Weeks passed before other tech companies dared to venture into the IPO market and Facebook eventually bottomed out at $17.73 in Sept. 2012.

But in the year since the IPO, the majority analysts have the stock as a “buy” with 12-month targets at roughly $32 per share, and some as high as $37. It closed down 49 cents at $25.75 in trading yesterday.

“Starting in September… they started shifting the conversation from things like user experience and engagement to monetization and mobile,” Kessler said. “I think that really helped get people more interested and excited about the stock.”

Facebook CEO Mark Zuckerberg told Fortune magazine the social networking company reinvented itself as a mobile first company, planting mobile engineers in all product teams.

“We made this transition to being a public company, and at the same time we made this transition into being a mobile company,” Zuckerberg said in the Apr. 29 article.

Changing the conversation nearly doubled Facebook’s low to roughly $30 per share. A year after the IPO, the stock has stabilized .

NASDAQ, however, is still feeling the lingering effects of the botched IPO. It’s losing out on tech IPOs to the NYSE, and will be paying a paltry $62 million to brokers who lost money because of their failed systems, despite claims brokers lost millions on the Facebook IPO.

The Wall Street Journal is reporting the U.S. Securities Exchange Commission is close to releasing details on a $10 million fine for the botched Facebook IPO — a sum that would make it the largest fine from the regulator against an exchange.

Glitches aside, Smith said it was the over-valuation of Facebook that led to its stock woes.

“Too many investors were looking at private market trades that were disconnected from reality,” Smith said.

Since Facebook, Smith said valuations have been more investor-friendly. In 2012, Smith said 40 per cent of IPOs were priced at the low end of the evaluation range, leaving room for investors to make major gains when companies hit the market.

“Investors are more careful, but they’re still interested in growth companies,” Smith said.

And 13 years after the dot.com bubble burst, investors are still trying to price out the web.

“What is the Internet worth and which ones are going to be the valuable ones?” Smith asked.

“Facebook has caused many constituencies to kind of re-think IPOs as vehicles to raise capital as well as invest capital,” added Kessler. “It definitely was important but maybe not for the reasons those who were involved might have expected.”

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